Folly or fortitude?

[BIRMANBOY]

How appropriate that your avatar is Satan..LOL (in a hearty and slightly bemused manner, of course) From the medieval story of Faust who made a pact with the devil promising worldly goods and riches in return for signing away his soul. That's a huge leap to maintain that "most people cannot get rich without borrowing". Whatever happened to get well educated/trained and work hard?. Oh no, no no that is just so old hat...surely its so much easier just to borrow? However glad that you have outgrown your earlier position...you must be over 30 now

I think for most people, you cannot get rich without borrowing. Most of us initially borrow for property and get ahead that way as there is probably less volatility in property and you are less likely to end up jumping out the 8th floor window in despair when everything goes South. I've bought shares effectively on debt using property as collateral, when the opportunity was too good to miss, but don't need or want to now. I wouldn't borrow anything I couldn't easily afford to lose.

[Aaron]

Only time will tell if s/he is wise or foolish.
I have a margin facility with ASB Securities currently unused as I await the next big crash as well as a revolving mortgage which is currently paid off but I would draw down on this first as mortgage interest rates are better than margin loan rates.

I would be worried about borrowing to invest in only one company but people borrow to buy businesses all the time sometimes it is the only way to get ahead. It has been pointed out many times how leverage can boost your profits as well as wipe you out if it goes bad.

For example take Spark, say you purchased shares in this company in January at $2.10 and sold in October for say $3. If you had $50,000cash to invest you could have made $21,428 ((.9/2.1)*50,000) capital gain as well as $5,434 in dividends ($50,000/2.10=23,800shares times Mar & Sep Div .22833)
Profit $26,862
Had you utilised your margin loan to its fullest you could have bought $166,667 of Spark ($50,000/.7) $50,000 equity $116,667 debt. That is a capital gain of $71,429 and dividends of $18,107 (79,300shares * .22833) Interest on margin loan 7.2%per annum Jan to Oct $7,000.
Profit $82,536
(better check my figures they are only rough but are hopefully close)
Now add another $200,000 more shares from your revolving mortgage and I have almost convinced myself to go all in. It is just that I have held Telecom shares since they were over $6 and with dividends I may just be breaking even. I haven’t tried working it out. If I had used leverage I would have been wiped out.
If you have done some research it starts to change from gambling/speculating to high risk investing.
I don’t trust my own research or that of professional analysts no one can see the future but without some risks you aren’t going to get ahead significantly. The more you know and understand the less risk you are taking. Anyway it is almost mandatory to invest with debt in this day and age as the world central banks are suppressing interest rates while trying to boost inflation so that those pesky debts disappear over time. We wouldn’t want the savers to get ahead in life.

[BIRMANBOY]

May God have mercy on all those poor sailors who set foot on this ship

Only time will tell if s/he is wise or foolish.
I have a margin facility with ASB Securities currently unused as I await the next big crash as well as a revolving mortgage which is currently paid off but I would draw down on this first as mortgage interest rates are better than margin loan rates.

I would be worried about borrowing to invest in only one company but people borrow to buy businesses all the time sometimes it is the only way to get ahead. It has been pointed out many times how leverage can boost your profits as well as wipe you out if it goes bad.

For example take Spark, say you purchased shares in this company in January at $2.10 and sold in October for say $3. If you had $50,000cash to invest you could have made $21,428 ((.9/2.1)*50,000) capital gain as well as $5,434 in dividends ($50,000/2.10=23,800shares times Mar & Sep Div .22833)
Profit $26,862
Had you utilised your margin loan to its fullest you could have bought $166,667 of Spark ($50,000/.7) $50,000 equity $116,667 debt. That is a capital gain of $71,429 and dividends of $18,107 (79,300shares * .22833) Interest on margin loan 7.2%per annum Jan to Oct $7,000.
Profit $82,536
(better check my figures they are only rough but are hopefully close)
Now add another $200,000 more shares from your revolving mortgage and I have almost convinced myself to go all in. It is just that I have held Telecom shares since they were over $6 and with dividends I may just be breaking even. I haven’t tried working it out. If I had used leverage I would have been wiped out.
If you have done some research it starts to change from gambling/speculating to high risk investing.
I don’t trust my own research or that of professional analysts no one can see the future but without some risks you aren’t going to get ahead significantly. The more you know and understand the less risk you are taking. Anyway it is almost mandatory to invest with debt in this day and age as the world central banks are suppressing interest rates while trying to boost inflation so that those pesky debts disappear over time. We wouldn’t want the savers to get ahead in life.

[Aaron]

May God have mercy on all those poor sailors who set foot on this ship

What is the maths wrong? It is not an endorsement for borrowing to invest but if you get it right leverage can boost your returns.

Or are you still upset because I think national superannuation should be means tested like any other welfare payment. Build a bridge get over it. National won the election anyway so it isn't an issue for the next three years. National won on a policy of ignoring the affordability of national superannuation. John Key doesn't care he won't be relying on national super when he retires. Me neither after I leverage up after the next big crash. I'll keep you posted on how I get on.

[Biscuit]

...you must be over 30 now

Sadly, yes I am over 30. I bought my first share when I was 18 and lost more than I made in my early twenties through a couple of companies that went belly up - both with crooked management, in my opinion. I am glad I did not borrow to invest back then, and I am not advocating it as an easy way to riches! I'm very well educated and have a great job, but I'm realistic enough to know that unless you earn way more than I ever have, or are a much better investor than me, saving on its own won't make you rich. You need to borrow. A simple truth I think.

[BIRMANBOY]

I agree that saving by itself wont make anyone rich unless you happen to have a high earning capacity and low expenditures. The chances of those two components being found in the same place at the same time are so small as to be probably discounted. I just don't believe that borrowing is the answer however. I'm sure it works for many people but I would guess that more people get in trouble because of it than are saved by it. Compounding growth is the answer to how do we get rich and has the added benefit of not requiring large amounts all at once as well as not leaving behind the borrowers who made poor choices or bad decisions or just got unlucky with bad timing. Have a look at this site for some very interesting calculators http://www.thecalculatorsite.com/ However the TRUTH is such a subjective concept that I don't believe it can ever be "simple".

Sadly, yes I am over 30. I bought my first share when I was 18 and lost more than I made in my early twenties through a couple of companies that went belly up - both with crooked management, in my opinion. I am glad I did not borrow to invest back then, and I am not advocating it as an easy way to riches! I'm very well educated and have a great job, but I'm realistic enough to know that unless you earn way more than I ever have, or are a much better investor than me, saving on its own won't make you rich. You need to borrow. A simple truth I think.

[kiora]

How do other investors view a strategy of borrowing from the bank to fund share purchases? On another thread I read someone had borrowed several hundred thousand (mortgage on their home) )to buy shares. To me this just seems so foolhardy and risky. The purchase was for a relatively new entrant but is not a speculative share and does pay a decent dividend so I can see why they have done it but I don't see that this strategy as being something I would ever try myself or recommend as being part of an investment regime. How many others have had success (or failure) doing this? I/m not expecting many to fess up but somewhat curious.. I mean the margin of profit cannot be much between mortgage and returns from dividends so I can see how you could be consequently left very exposed in a downward or sluggish market. Seems very close to gambling to me?

Margin Facilities in my experience are folly particularly when the market turns.They severely impact the volatility of your portfolio and puts the decision making of your investments in the hands of the money lenders.Be very very wary.It can turn a profit into a severe loss very quickly & put you off investing for life !
On the other hand I have found a revolving credit facility over property to be very useful & profitable for the right investment.It allows your investment portfolio to benefit from rent and capital gain of property (low risk???)while benefiting from the investment in a higher risk,higher return investment such as shares.In my example, I have posted in other posts,in Infratil.Over long term increased in value at 17 % a year while paying down the drawn down facility with income.Its a win win compounding gains on gains IMHO

[BIRMANBOY]

Glad its positive for you but what happens if the market turns on you? We have had a sustained share market appreciation and most things are positive...at the moment. Shares can go south very quickly. In a recession s**t can occur in many shapes and forms...and having loaded up on debt may not be a healthy place to be.

Margin Facilities in my experience are folly particularly when the market turns.They severely impact the volatility of your portfolio and puts the decision making of your investments in the hands of the money lenders.Be very very wary.It can turn a profit into a severe loss very quickly & put you off investing for life !
On the other hand I have found a revolving credit facility over property to be very useful & profitable for the right investment.It allows your investment portfolio to benefit from rent and capital gain of property (low risk???)while benefiting from the investment in a higher risk,higher return investment such as shares.In my example, I have posted in other posts,in Infratil.Over long term increased in value at 17 % a year while paying down the drawn down facility with income.Its a win win compounding gains on gains IMHO

[Biscuit]

I just don't believe that borrowing is the answer however. I'm sure it works for many people but I would guess that more people get in trouble because of it than are saved by it.

"Saved by it"? Sounding a little religious there Birmanboy? You know you want to try it...everyone does, you could be rich...go on, just a little bite.

[kiora]

Glad its positive for you but what happens if the market turns on you? We have had a sustained share market appreciation and most things are positive...at the moment. Shares can go south very quickly. In a recession s**t can occur in many shapes and forms...and having loaded up on debt may not be a healthy place to be.

Yes if loaded up to hilt on high risk & highly volatile share/investments but for the right investments revolving credit just part of the 'business of investing'.
I was caught in the 80,s with margin lending facilities and it was not pleasant & don't plan to go there again !
Over time by using revolving credit with patience my investments value is now 10 times value of revolving credit facility over 30 years of investing plus the value of the property..Its better than having cash in the bank waiting for the next investment to come along.
I would imagine a lot of old timers on ST would operate the same way.